Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D. Colo.: Steak n Shake franchisees granted restraining order preventing termination, (Aug 16, 2013)

By Peter Reap, J.D., LL.M.

Two Steak N Shake restaurant franchisees, Globex Company, LLC and Springfield Downs, LLC (collectively, the "franchisees"), were entitled to their requested temporary restraining order (TRO) against Steak n Shake Enterprises, Inc., and Steak n Shake, LLC, (collectively, the “franchisor”) preventing the franchisor from denying them access to the franchisor’s computer systems and software and from denying them access to the franchisor’s proprietary foodservice delivery and discounts, the federal district court in Denver has determined (Steak N Shake Enterprises, Inc. v. Globex Company, LLC, August 14, 2013, Moore, R.).

Background. The franchisor filed suit against the franchisees after purporting to terminate them for alleged breaches of the parties’ agreements. The franchisor alleged that it terminated the agreements for cause, but that the franchisees continued to use its trade name and marks and hold themselves out as still affiliated with the franchisor. The franchisees’ alleged breaches consisted of: (1) failing to use a $4 menu specified by the franchisor; (2) failing to display the required $4 menu marketing materials; (3) using different menus than those provided; and (4) charging customers prices that were far higher than the prices specified by the franchisor.

After filing suit, the franchisor moved for a preliminary injunction which was set for a hearing. The franchisor also took the following actions: (1) shut down the franchisee’s point-of-sale ("POS") systems; (2) instructed the franchisor’s sole foodservice provider to refuse to ship proprietary Steak n Shake products to the franchisees and to refuse to offer the franchisees a contract discount on nonproprietary products; and (3) cut off the franchisees’ ability to access key internet, intranet, and office portals. In response, the franchisees filed the instant motion for a restraining order.

Analysis. The requirements for the issuance of a TRO are similar to those for the issuance of a preliminary injunction, the court noted. The movant must establish: (1) it will suffer irreparable injury unless the injunction issues; (2) the threatened injury outweighs any damage the proposed injunction may cause the opposing party; (3) if issued, the injunction would not be adverse to the public interest; and (4) the movant has a substantial likelihood of success on the merits. Here, the franchisees so established, the court ruled.

The net effect of the franchisor’s actions was the removal of the systems, goods, and labor that the franchisees needed to operate their restaurants, according to the court. The franchisees estimated that they lost roughly 1,171 guests per store from August 8, 2013 through August 10, 2013 and that they were now out of proprietary products. Under the current situation, it would be difficult if not impossible for the franchisees to continue their business operations, much less as Steak n Shake restaurants.

The franchisees showed that unless the requested TRO was entered they would suffer irreparable injury, as it was certain that their restaurants would have to close or, to the extent they could be operational, be operated as something other than Steak n Shake restaurants. For example, the franchisees were, or shortly would be, out of proprietary food items for sale, were losing customers, had suffered and would likely continue to suffer loss of employees, and were suffering diminishment of their competitive positions in the marketplace.

Next, the threatened injury to the franchisees significantly outweighed any damage the proposed injunction could cause the franchisor, the court held. As previously stated, in light of the franchisor’s actions, the damage from potential closure of the franchisees’ restaurants was certain and great. The franchisor’s damage, if any, would be less.

The franchisor’s allegations were limited to pricing issues; for example, there were no allegations that the franchisees were operating unsanitary restaurants or offering poor food products that would tarnish the image of Steak n Shake. On the contrary, because the franchisees’ restaurants remained operating under the Steak n Shake name, preventing the franchisees from operating their restaurants smoothly, offering the use of credit cards, and offering Steak n Shake products caused not only damage to the franchisees but also more damage to the franchisor than if the franchisees were allowed to continue to operate as before, the court reasoned.

The TRO would not be adverse to the public interest. The franchisees employed approximately 160 individuals and generated in excess of $4,000,000 in annual gross revenue. Allowing the franchisees to temporarily operate their restaurants as they had been would be in the public interest.

Finally, the evidence was sufficient to establish a substantial likelihood of success on the merits, the court decided. The franchisor’s actions, and lawsuit, were premised on the lawful termination of the agreements based on the franchisees’ alleged failure to follow pricing and marketing policies. The franchisees’ affidavits presented sufficient evidence that the lawfulness of the terminations were in dispute and, for the purposes of a TRO, to establish a substantial likelihood of success on the merits. By this determination, the court was preserving the status quo existing between the parties prior to the controversy between them and not resolving the merits of the action between the parties.

The case is Civil Action No. 13-cv-01751-RM-CBS.

Attorneys: Fredric Adam Cohen (Cheng Cohen, LLC) for Steak n Shake Enterprises, Inc. Scott Thomas Kannady (Brown & Kannady, LLC) for Control LLC.

Companies: Globex Company, LLC; Springfield Downs, LLC; Steak n Shake Enterprises, Inc.; Steak n Shake, LLC; Control LLC.

Cases: FranchisingDistribution ColoradoNews